Inclusive Profit

Early-stage investors at microfinance institutions are reaping multibaggers

Davis Golding, chief investment officer at US-based Equator Capital Partners recently sold a 3.13% stake (1,000,000 shares) in microfinance player Satin Creditcare Network for Rs.37.63 crore through ShoreCap II. Post the sale, ShoreCap II’s holding is down to 9.1%. Equator manages the ShoreCap family of funds which actively invests in inclusive financial services entities. Through ShoreCap International, Equator had earlier invested in Hyderabad-based MFI Bhartiya Samruddhi Finance. Equator infused growth capital of Rs.21.9 crore into Satin in 2010 when the MFI industry was coming to terms with the after-effects of Andhra Government’s clampdown on micro-finance institutions.

Danish Microfinance Partners has also been an active seller. After selling a tranche worth Rs.46 crore, it again sold stock worth Rs.63.53 crore in early July. Equator’s part exit or Danish’s selling has not dampened the enthusiasm of other investors. Morgan Stanley is buying and/or warehousing quite actively. In June & July, it bought nearly Rs.90 crore worth of stock. DSP BlackRock Equity Fund and BlackRock India Equities (Mauritius) have also acquired stock worth Rs.21 crore. This buyer optimism has stoked price action catapulting the stock up 60% since June. In comparison, sector warhorse SKS Microfinance (now Bharat Financial Inclusion) is up 34% during the same period.

Satin has compounded its AUM at 79% over FY12-16 (currently at Rs.3,270 crore). Uttar Pradesh and Bihar contribute the most to Satin’s AUM at 41% and 18%, respectively. Satin is currently trading at 3x estimated FY18 Book and analysts are baying for a even higher multiple. They believe as Satin grows its AUM, the larger book will bring down operating cost and boost margin. Satin borrows at 14.5% and lends at 24%. This keeps it within the 10% margin cap prescribed by the Reserve Bank of India. With Satin expected to bring down its cost of funds through lower rates and a better borrowing mix, its RoA of 2.2% is expected to inch closer to SKS’ 4.2%.